IDFC First Bank Share | NPA: Our trip in life is our gross NPA should never cross 2%, our net NPA 1%. We are working to that formula: V Vaidyanathan

When Capital First acquired the bank, the economic landscape was very different and it was a merger of two large corporate balance sheets. There were a lot of assets and no liability. Then came the slowdown which impacted every major corporate balance sheet. You decided to move forward but the down cycle started and then Covid. It must not have been easy?
First of all, we did not acquire the bank, it is a merger. But yes it was crazy. The merger, first of all, is a full one-year process and we had to get the merger through NCLT, RBI and all that but frankly when it all came through, within about a year Covid hit and of course the infrastructure cycle did not play out.

I do not want to look back so much. I just want to see that three years have gone by and certainly most things are settled now.

How did you deal with the initial hiccups because there were a lot of hiccups initially largely because of the curve of the economy. There were DHFL, cases. Were these challenges?
All that but there is one thing we did which really played well and I am very happy about the way we have played it. First of all, it was tough to answer questions straight in board meetings quarter on quarter or phase one but what worked was that we were very straight. When we came to your channel or any other channel, we said the numbers straight, we did not find some cute interpretations. We took the provisions straight and then we told people a plan every time. So someway the market believed us, people believed us, customers believed us I think for some reason our bank enjoys really fantastic goodwill, I really think so.

Since you reported six quarters of losses, was there any point in time you would say kahan fass gaye (what I have got into)?
It will be very unfair of me to say that because this bank has a good brand, people respect this institution and it has a banking licence. I never look back and say oh! my god what have we done! But I cannot deny that some of the hits were hard. Like Vodafone – Rs 3,200 crore. Finally, there was no loss but the period was so tense.

What I admire about IDFC First Bank the franchise is the brand value and the fact that your CASA now is north of 50% and some of the strong banks have that kind of a strong CASA. What is your liability franchise like?
We are very strong, we are very happy about that. I daresay very few banks in India have put in 50% CASA in three and a half years flat. One thing is, the bank may have posted losses but people trust our bank, they trust us. They think of us like a good quality institution. Our products will come later. Our very honest and very straightforwardness appealed. Somewhere along the way, our biggest thing was how deposits came to us. It is a revelation, it is a big satisfaction.

Now that the liability franchise has been built, let us talk about the lending part. I was reading in your note to the shareholders that you have learnt the art of saying no.The number of loans as a bank you are saying no to is far higher than loan sanctions. Walk us through the culture here?
Unfortunately this is true. The demand in this country is so crazy high we are having to reject 40 or having to, it does not give us great joy but having to reject 40% to 60% of the applications.

We have a ten-step process to giving a loan. The process first involves bureau check; some customers fall off. Then we do some go no-go checks of scorecards, some customers fall off. Then we do cash flow checks and some customers fall off. Then we do ratio checks of debt-equity and all that and some customers fall off. Then we do some Google check and some customers fall off. Then we do a title deed check about security and some customers fall off. It is reject, reject, reject and finally you approve only 40-60%. But a good thing is you do it so carefully. For us, this culture about having low NPA is a fetish. Our trip in life is our gross NPA should never cross 2%, our net NPA should never cross 1%. We are working to that formula.

Do you think that would be maintained for the next three years at least?
V Vaidyanathan: I can tell you for 12 years except Covid, our gross NPA never crossed 2%. That is quite a lot – 10 years. During Covid, it went up of course but now it has come back to 2% and 1%. So for the next two-three years, as far as I can see it will be two and one.

Nikunj Dalmia: In terms of the approach, what you are doing now? Banks are moving to be technology/AI dominated. Some would argue that in India, big banks are getting bigger and new banks who have a small balance sheet may not have the right to win because it is really a war of David versus Goliath?

V Vaidyanathan: That is not true. We should not forget that this country is unbelievably underserved and there should be a space for banks. Look at the country’s GDP; today we may be $2.63 trillion. In 2030, we will be something like $7 trillion. Doyou know how many gig economy employees are there in the country? It is a new kind of employment.

India has about 7.78 million gig economy employees today.In 2030, it would be 3X or 24 million. So that kind of growth is coming and I do not think honestly some three or four or five banks cannot service the country. It has to have more players and we have set a very good platform, deposits and CASA is 50%, branches are there, network is there, lending machine is there. Our bank cannot be stopped.

Is there a number where you would say that this is the aspirational number. I eventually want to take the bank to in terms of balance sheet size?
According to me, growth of 25% per annum will be a story for a long long time…

But that is because of pace…
That is because of pace. Now let us pick the numbers. Suppose our loan book today is Rs 1 lakh crore. Do not forget that once upon a time even

had a Rs 200 crore balance sheet and today it is Rs 7-8 lakh crore. was once upon a time a Rs 1,000-crore bank; today it is Rs 8-10 lakh crore on the retail side. The point is that these games never stopped.

My answer is that if a balance sheet doubles every three and a half years or so, we should look at Rs 5 lakh crore, Rs 10 lakh crore and Rs 20 lakh crore. This game will never stop, it will definitely go past my lifetime.

While in India it is very easy to lend, the challenge is of course maintaining that asset quality, ensuring that as you grow the asset quality is not compromised. That is where the culture part comes in, that is where the entire process comes in?
It is not only culture there are two things here, I told you culture wise we are very conservative and to maintain a net NPA 1% the culture is inbuilt for 10 years. It is actually the tools that have come into the country these days, are phenomenal. There are four credit bureaus. People really care about credit bureau in the country. Do you care about a credit score?

Of course all of us do now.
Everybody cares and that is a very big control. The second thing is that the cash flow evaluation technologies have dramatically improved. The underwriting is much better than what it was even three-five years ago. Also, because of UPI, the collection capabilities have dramatically improved and we are not sending call centres agents any more. It is another UPI link getting money. For these fundamental constructs, the quality of credit will get better in the country because the guardrails have come.

What does this mean for your shareholders? I would imagine that ROA, which is an important benchmark to understand how efficient the bank is, will go closer to 2 and will certainly stay above one?
Okay, something very important about the bank in case you missed it; our ROA, return on assets at the time of merger was zero.

Because the merger was between two liabilities– two asset…
Normally to move from zero to 1% takes a long time. It takes maybe five or six years. We got there in three years. We are now a 1% ROA bank in three years. So the pace at which we fixed the profitability is something to really watch. Let me tell you this story will not stop at 1%, let me leave it at that.

What gives you the confidence?
Because the underlying economics is like that. Our incremental business ROA is upward of 2% and we will be one of the healthier ROAs in the country.

The most important way of understanding any business is customer satisfaction. What have you done in the last three years to ensure that your customer satisfaction ratings are high?
Just see the numbers. If a bank has grown retail deposits by Rs 60,000 crore in three years, that is a big number for a start up bank. I think there is something phenomenal about our proposition which is getting us that kind of stuff. That is the number but let me tell you how we do it.

We are a new bank, the way we think about it is that we have an opportunity from day one of building. Our customer propositions are phenomenal. When did you see savings account interest rates on a monthly basis? Not for the last 75 years. We brought this to the country. When was the first time you saw credit cards with no annual fee, joining fee and no minimum spend conditions? You never saw it in the country; we brought it to the country.

For everything whether FASTag or credit cards or savings account or loans, our theory is; we are a new bank whatever we come to the market no matter what the market is at, give something special. I tell you if you are not a customer of a bank you become one, you are a shareholder or not I leave that to you. But I can tell you should be a customer because the bank is putting together really special products.

We have a lot of employees and people and customers at all level and I am finding a buzz in the bank. If you are a fly on this wall and you should be since you are here, this bank has something buzzing from within. There is a lot of happiness from within about how we think, how employees, our culture are aligned. There is no negativity in this place about politics and all that, there is something pleasant about this bank.

This is Navratri, the festival season. It is a new beginning. I am really excited and you can feel the energy and the vibe.
You should come and see the employees, you will feel it, there is something special.

If you look at the history of the Indian banking sector, one is the whole big picture, macro tailwind we are in but if I look at the history of great banks, what really differentiates them is the board, the culture and the person at the helm. What would you say to that?
That is absolutely true. In our case, we really have a good board. It is all star-studded high quality people with a lot of experience and frankly our board focuses too much on corporate governance. They would not let one fly go past, that is really good. And that is that.

Culture wise we talked about it. We are really good about that. About the man at the helm, I cannot comment but I can just say that I believe that the bank is built on very strong fundamentals, good liabilities, good brand, good stuff, good corporate governance and all that. So I can look forward to this bank being a really successful bank in the long run and let me say the pride of the nation at least it is my wish like that.

Deepak Parekh once famously said that his biggest regret in life is that his holding in HDFC Group of Companies is less than 1%?
You know this happens to all first generation people, at Capital First at some stage I had about 15% of the company. With the merger, you grow and scale and raise equity. I am probably now at 2% but that is okay.

As you will grow you will have to perhaps dilute more?
We will dilute more but the joy is actually in the journey of building the institution and that is where my mind is.

We had a very engaging conversation at the last India Economic Forum and we had Mr Kamath and there was a real heart-to-heart exchange when you shared about your experience of when you took his blessings when you wanted to start your own venture. What was his reaction when you actually got the bank license?
Well it is a very funny story, the first time when I got success thanks to good backing by private equity in 2010-12, India was in a very bad situation economically. At that time, he got up from the seat and he was so happy because he was very tense for me. He felt I was doing something very risky and all that. So he just got up from the seat.

This is after you got the bank license?
After I got Capital First equity from Warburg Pincus. So I told him I got it. He got up, removed his tie in a filmy style, gave it to me and gave me a hug. But that was part one, part two is that five years later, this merger happened and I went to tell him that this happened and we are going to merge with IDFC and we are going to get a bank licence. He did not have a tie on him but you know what he did? I went home and by the time I reached home there was a red tie in a sealed envelope waiting for me, such a touching thing!

In fact every time we have an on the record, off the record conversation on the kind of franchise you are building Mr Kamath always has some of the nicest things to say. So that is a great endorsement coming from Mr Kamath himself.
To me Mr Kamath saying that means a lot. I think of him. Another amazing gentleman I met in my life is Mr Vaghul. He has such distilled wisdom which I have rarely seen in people. These are extraordinary people and to even get to meet them in our lifetime, is a privilege.